Understanding Sustainable ETFs: The Complete Guide to Green Investing

Sustainable ETFs are exchange-traded index funds that consider ecological, social and governance factors alongside profitability and security. They track special sustainability indices and exclude controversial sectors such as weapons, tobacco or fossil fuels. In Germany, around 770 such funds were tradable on Xetra in 2024, with assets under management of approximately 353 billion euros.

What is an ETF anyway?

An ETF, short for Exchange Traded Funds, is an exchange-traded index fund. It tracks an index, such as the MSCI WORLD, and buys the included shares in the same proportion. Investors acquire a stake in hundreds of companies with a single purchase.

Why index funds are so popular

Index funds are managed passively. No fund manager selects individual securities; the index determines the composition. This significantly reduces fees compared to actively managed investment funds. This cost saving has a noticeable effect on returns over the long term.

The difference from traditional funds

Conventional equity funds often charge more than one percent in annual management fees. ETFs are frequently below 0.3 percent. With a long-term savings plan, this gap makes up a considerable portion of capital over decades.

Sustainable ETFs – What you should know

Anyone wanting to invest sustainably quickly encounters a tangle of terms. Before capital flows into a green fund, it is worthwhile to examine the underlying rules. Not every product with the word "Sustainability" in its name delivers on what the title promises.

What sustainability means in ETFs

The financial industry has no uniform definition of sustainability. Each provider sets its own standards. Basically, it comes down to three areas: environment, social and corporate governance.

ESG, SRI and the key terms

With ESG investing, index providers evaluate companies based on Environment, Social and Governance. The term ESG thus describes environment, social and corporate governance. SRI stands for Socially Responsible Investing and applies stricter standards. In the SRI approach, only the most sustainable companies in a sector remain in the fund.

The three ESG letters explained in detail

• E nvironment: Resource management, CO2 emissions and circular economy.
• Social: Working conditions, human rights and treatment of employees.
• Governance: Transparent management, fair compensation and corruption prevention.

How do sustainable ETFs work?

A sustainable ETF tracks a special sustainability index. The index provider filters out those shares from a broad universe that meet its criteria. The fund then purchases exactly these securities.

Exclusion criteria as the foundation

First, the exclusion criteria apply. Companies from controversial sectors are excluded, such as defence, tobacco, gambling or fossil fuels. This rule seems straightforward, but has its pitfalls.

Tolerance thresholds and their weaknesses

Many exclusion criteria work with tolerance thresholds of up to 30 percent. A company with controversial revenues below this threshold remains in the index nonetheless. Those who look closely should therefore check how strictly the criteria actually apply.

The best-in-class principle

With the best-in-class approach, the index selects the most sustainable companies per sector. This sounds good, but can be diluted. With MSCI AC World ESG Screened, 2,479 of 2,919 companies remain. With such a large selection, green criteria play hardly any role.

What approaches to sustainability exist

Significant differences exist between the variants. An ESG fund and an SRI fund may sound similar, but differ considerably in stringency.

SFDR and the EU Disclosure Regulation

The EU Disclosure Regulation categorises funds. Article 6 has no sustainability objectives, Article 8 is considered "light green", Article 9 is "dark green". This regulation provides rough orientation for investors.

Article 9 as the strictest standard

Article 9 products pursue an explicit sustainable investment objective. Most green ETFs have only achieved Article 8 status so far. Those seeking the highest standards should look for this classification.

The SDGs as a framework

Some funds align with the Sustainable Development Goals. These SDGs of the United Nations define 17 objectives for a better environment and more social progress. A reference to these SDGs signals a thematic focus.

What themes and sectors are covered

Alongside broad global ETFs, there are specialised products. Investors can target individual themes or cover entire regions.

Broad global ETFs

The classic approach is based on the MSCI WORLD, supplemented with sustainability filters. Such funds diversify across many countries and sectors and are suitable as a portfolio foundation.

Thematic investments

Specialised ETFs focus on clean energy, electromobility or circular economy. These investments are more focused, but carry higher risk because diversification is lower.

Bonds and other asset classes

There are also sustainable variants for bonds. A green bond finances specific environmental projects. Those wanting to combine interest with a clear purpose can find suitable investments here.

Comparing sustainable global ETFs

Two approaches dominate the market for globally invested funds: developed market indices and broad indices including emerging markets. Both approaches have their merits.

Developed markets in focus

An SRI index for developed markets typically includes around 380 shares and limits each company's stake to a maximum of five percent. Controversial sectors are completely excluded, and diversification remains broad.

Diversified with emerging markets

Broader indices include emerging markets and thus contain around 550 shares. They weight US shares less and exclude alcohol, tobacco, gambling and weapons, among others. This increases geographical diversification.

Performance comparison over five years

A look at performance shows how close sustainable indices are to the classical standard:

• MSCI World: 13.4 percent annual return (2021 to 2025)
• MSCI World ESG Select Screened: 11.8 percent annual return

Performance differences are small. Depending on the timeframe, sometimes one index, sometimes the other comes out ahead.

Do sustainable ETFs deliver lower returns?

The widespread concern that green funds cost returns can be refuted by the numbers. Over five years, the MSCI World and its ESG variant differed by only 1.6 percentage points per year.

Why the return gap remains small

Sustainable indices often contain the same large companies as traditional funds, just weighted differently. Studies suggest that the risk of sustainably operating companies is actually lower in the long term.

Are sustainable ETFs safe investments?

An ETF reduces risk through broad diversification, but does not eliminate it. Price fluctuations are part of stock markets, even with green products.

Diversification as protection

The more securities a fund contains, the less impact the failure of a single company has. Broad diversification is the most important building block for limiting risk.

Diversification as a limitation

Sustainable ETFs often contain fewer securities than traditional products due to their selection criteria. This can limit diversification and slightly increase volatility.

Strengths and weaknesses of sustainable ETFs

Like any investment, green index funds have two sides. A sober look at both helps in decision-making.

The strengths

• Low fees compared to actively managed sustainable funds
• Broad diversification across many shares and sectors
• Exclusion of controversial business areas
• Returns close to the classical standard

The weaknesses

• Inconsistent definition of sustainability
• High tolerance thresholds for exclusion criteria
• Risk of greenwashing
• Sometimes limited data quality on many securities

Recognising and avoiding greenwashing

Greenwashing is the central challenge of this type of investment. Products appear green on the surface, but upon close inspection do not always deliver on what the name promises.

New EU rules bring clarity

Since April 2025, funds may only use the word "Sustainability" if at least 50 percent of capital flows into companies with environmental or social objectives. Numerous providers have had to remove terms such as "Climate" or "Sustainable" from their names.

What to look for in the criteria

Check the concrete sustainability criteria in the fact sheet. The smaller the proportion of companies included, the stricter the selection. Recognised seals such as the FNG seal provide additional guidance.

Who offers sustainable ETFs? The major providers and companies

Nearly all major fund companies now offer green products. Specialised companies and banks with an environmental focus are also active.

Major providers and their products

Established fund companies offer broad global ETFs with ESG or SRI filters. These products cover common indices and are tradable through virtually any depot.

Sustainable banks and advisory services

Institutions like GLS Bank have sustainability as the core of their business model. Those seeking personal advice can find specialised services around green financial products there.

Where to find information on sustainable ETFs

Before investing, it pays to compare. Several portals provide fact-based overviews of costs and composition.

Comparison portals and databases

Platforms like justETF allow filtering funds by criteria and comparing performance. Through justETF, you can quickly check ISIN, fees and payout method.

Independent tests

The Stiftung Warentest and Finanztip regularly rate green funds. Finanztip recommends broadly diversified equity ETFs with clear exclusion criteria. The Fair Finance Guide also checks how sustainably a bank itself operates.

Setting up a sustainable ETF savings plan

A savings plan is the easiest way to build wealth over the long term. Even small monthly amounts add up over the years.

Choosing the right depot

For a savings plan, you need an inexpensive securities depot. Look for low order fees and a wide range of sustainable ETFs.

Invest regularly

With sustainable ETF investing, you pay a fixed amount each month. The dollar-cost averaging effect smooths price fluctuations because you buy more shares at lower prices.

The path to the right green investment

Before investing money, clarify your goals. Is the focus on environment, social responsibility or fair corporate governance?

Five steps to the right fund

1. Define investment focus and set sustainability criteria
2. Check SFDR classification and exclusion criteria
3. Question best-in-class ratio and tolerance thresholds
4. Compare fees of multiple funds
5. Ensure broad diversification in your portfolio

Think long-term

Green investing unfolds its benefits over many years. Those who understand the criteria and diversify broadly combine environmental objectives with solid returns. You can find more fundamentals on securities and taxes in the guides on aktie.com.

Frequently asked questions on green investing

The same questions keep coming up around sustainable funds. The most important answers at a glance.

Which ETF is the most sustainable in the world?

There is no single leader. Article 9 funds with strict SRI criteria and a small best-in-class ratio are considered particularly consistent. The best fund depends on your personal objectives.

Should you invest in sustainable ETFs?

For long-term oriented private investors, green index funds are a sensible addition. Return differences compared to the classical standard remain small, and environmental objectives can be combined.

How much capital do I need to get started?

Many banks start a savings plan with just 25 euros per month. This allows entry into investing without large initial capital.

Green investing in a growing market

The market for sustainable investment has developed rapidly. The figures illustrate the extent.

Market figures

• Number: from 8 funds (2014) to 770 (2024), slight decline to 702 in 2025
• Assets under management: from 0.12 billion euros (2011) to 353 billion euros (2024)
• Market share: around 32 percent of all tradable ETFs in 2023/2024, approximately 25 percent in 2025

After years of explosive growth, consolidation set in during 2025. For investors, this means stricter rules, clearer names and greater reliability in selecting green financial products.